The Economist (London): The guilty men of Wall Street

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The guilty men of Wall Street

Oct 14th 2008
From Economist.com


Jail time for financial titans?

LIFE must seem terribly unfair right now for Dick Fuld, who headed Lehman Brothers when it filed for bankruptcy last month. Given the willingness of governments around the world to pump money into the banking system in a desperate bid to keep it alive, Mr Fuld must wonder how on earth he became the fall guy, in charge of the only significant firm that was allowed to fail. During testimony before Congress last week, he said that until “the day they put me in the ground, I will wonder” why AIG was rescued and Lehman not.

Since Lehman’s collapse, Mr Fuld has reportedly been attacked by an employee in the company gym. Photos of his family have been posted on the internet. His testimony in Congress probably felt more like a lynching, as his attempts to explain what actually happened were repeatedly interrupted by attacks on his enormous pay packet (no matter that a large part of that was in shares that are now worthless). At one point, a Republican congressman, John Mica, told him, “If you haven’t discovered your role, you’re the villain today. You've got to act like a villain.”


Alas, Mr Fuld may need to get used to playing this role, perhaps even in court and ultimately in jail—as indeed may some of his fellow erstwhile financial titans.

Not that there is any clear evidence that Mr Fuld or his peers have done anything unethical—much less anything to deserve a long jail term. But in the current political climate, the government will feel great pressure to punish a few of the people whom the public hold responsible for the unpopular bail-out of Wall Street. And persuading a jury to give the benefit of the doubt to a multi-millionaire banker is exceedingly difficult, making it easy for the government to win a case on thin evidence.

If you doubt it, look at the pattern of past financial crises, going back to Richard Whitney, a former president of the New York Stock Exchange, who was sent to Sing Sing in the 1930s for embezzlement. More recently, (and pertinently to today’s financiers), after Drexel Burnham Lambert collapsed and the leveraged-buyout bubble burst in the late 1980s, Ivan Boesky and “junk bond king” Michael Milken were both jailed, with Mr Milken protesting his innocence to this day.

More recently, a host of corporate scandals at the start of this decade, including the failures of Enron and WorldCom, led to former chief executives such as Jeffrey Skilling, Bernie Ebbers, Dennis Kozlowski and Conrad Black being jailed, some of them probably for the rest of their lives.

So far, government prosecutors have mostly focused on the lower level contributors to the current financial meltdown, such as mortgage brokers who approved fraudulent applications, and some hedge-fund managers at Bear Stearns who allegedly misrepresented the health of their funds. But that will probably change, as prosecutors deploy “flipping” tactics honed during racketeering trials, in which lower level employees receive leniency in return for testifying against their bosses.

One popular tactic prosecutors have used against bosses is to contrast their public statements about the health of their company with evidence that suggests they privately knew it was in trouble. This ploy led to the conviction of Kenneth Lay, Enron’s former chairman, who said the firm was in good shape as it hurtled towards bankruptcy.

Ominously, two recent stories in the Wall Street Journal have suggested that top executives at Lehman and AIG had issued public reassurances while in possession of private information to the contrary. Though it is hard to see what a chief executive is supposed to say when his firm is fighting against bankruptcy (anything other than “the firm will survive” guarantees it won’t), such inconsistency looks bad in court.

At least Mr Fuld can take comfort from the fact that, as yet, there is no evidence that he sold shares in his firm as it collapsed—unlike Lay.

What can worried Wall Street titans do? One option is to give their money away. That seemed to take the heat off Gary Winnick, boss of a bankrupt telecoms firm called Global Crossing, who in 2002 pledged $25m to former employees who lost retirement savings, and urged other chief executives in similar situations to do the same.

Another option is to skip the country, to somewhere that will not readily extradite to America. Marc Rich, an oil trader, fled to Switzerland in 1983, after being accused of tax evasion and illegal deals with Iran. He was eventually pardoned (controversially) by Bill Clinton.

Kobi Alexander, the former boss of Comverse Technology, is still fighting extradition from Namibia, to which he fled in 2006 following accusations of improper options-backdating. (There has been speculation that he is actually now in Switzerland.) It would not come as a complete surprise if Mr Fuld, a fan of big-game hunting, decided that now is the perfect time for an extended Namibian safari.